Oct 28 (Reuters) - Goldman Sachs Group Inc has been hit with a new $1.07 billion lawsuit for having allegedly sold risky debt that it expected would tumble in value to an Australian hedge fund, causing that fund to become insolvent.

The lawsuit by the Basis Yield Alpha Fund alleges fraud, breach of contract and negligence, and seeks to recoup $67 million of losses plus $1 billion of punitive damages.

It was filed on Thursday with a New York state court in Manhattan. Basis Yield was managed by Sydney-based Basis Capital Funds Management Ltd.

Basis Yield sued three months after a U.S. judge dismissed a similar case, saying the fund could not sue in federal court under U.S. securities laws because its investment in the Timberwolf 2007-1 collateralized debt obligation did not qualify as a “domestic” transaction.

Timberwolf was cited in a scathing U.S. Senate panel report in April that faulted Goldman, Deutsche Bank AG and others for hawking debt they expected to perform poorly.

That report said Goldman kept marketing Timberwolf even after Thomas Montag, an executive who is now Bank of America Corp’s co-chief operating officer, in an email to a colleague called Timberwolf “one shitty deal.”

In the new complaint, the Basis Yield fund said it entered $80.8 million of credit default swaps related to “triple-A” and “double-A” rated Timberwolf debt. It said it also bought $12.3 million of “triple-B” rated debt tied to subprime residential mortgages and issued by another CDO, Point Pleasant 2007-1.

These transactions, the fund said, “provided a vehicle for Goldman to unload its toxic inventory and to profit from the decline in value of the very securities it was recommending that its clients purchase.”

Goldman, it added, even offered sales staff “ginormous” credits to shed the securities.

Within weeks, the transactions began to tumble in value, and Basis Yield began to liquidate within two months. It said it lost $56.3 million on Timberwolf in less than six weeks, and $10.8 million on Point Pleasant in less than three months.

Goldman on Friday denied wrongdoing. In a statement, it said “we acted appropriately and refute in the strongest possible terms any suggestion that Basis Capital was misled.” It also said Basis Capital “advertised itself as one of the world’s most experienced hedge funds and CDO investors.”

The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc et al, New York State Supreme Court, New York County, No. 652996/2011.